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Retirement : What
kind of life do you want to live
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Imagine your perfect
life. How does your day get spent?
Would you have a job
to go to? Or would you not need / want to work? Would you have a hobby? Would
you do social work? Would you spend time traveling to new places with your
family?
life do you want to
Specifically, how is
your perfect life different from the life you lead today?
Your perfect life is
what your Retirement should be like. This is your chance to relax after you have
worked for so many years.
Just remember,
things cost money. Maintaining your current lifestyle will cost more tomorrow
than it costs today. And not only that, but today you spend a large part of your
day at the office. When you retire, you will have much more free time.
You want to live a
retired life where you have self respect, where you are financially independent
and hopefully, very healthy. This will not happen on its own. You need to plan
to achieve this.
Let's see a
Retirement Planning Case Study.
Mr. Shah is 40 years
old, and he spends approximately Rs. 50,000 monthly on household expenditure on
his wife, his two kids and himself.
The family's current annual healthcare expenses are approximately Rs. 2,50,000.
They take an annual vacation within India, which costs Rs. 2,00,000 totally.
Facts of the
case:
- Retirement Planning
- Medical Contingency Planning
- Vacation Planning
So, how much money
does Mr. Shah require for his 3 goals?
We can move forward
goal by goal.
Retirement Planning
Let us see how much Mr. Shah requires to maintain his current lifestyle.
|
Household Expense Inflation p.a. |
7% |
| Healthcare Expense
Inflation p.a. |
10% |
| Household Expense p.a.
today (Rs.) |
600,000 |
| Healthcare Expense p.a.
today (Rs.) |
150,000 |
| Household expense p.a. at
time of retirement (Rs.) |
2,423,243 |
| Healthcare expense p.a. at
time of retirement (Rs.) |
(1,009,125 |
To maintain his current lifestyle, Mr.
Shah requires approximately Rs. 12,00,00,000.
That is, he needs Rs. 12 crore.
To accumulate Rs. 12 crore within 20 years, Mr. Shah needs to invest Rs.1,27,000
per month into a well performing diversified equity fund portfolio. Assuming 15%
return on equity, the corpus will be built by 2027. For the last 3 years before
retirement, the corpus should not be exposed to any risks. So when the corpus is
ready, by 2027, it should be redeemed from equity and invested into safe fixed
income instruments to protect it.
Medical Contingency Fund Planning
For their increased medical expenses during retirement years, Mr. and Mrs. Shah
want to have a ready corpus of Rs. 10 lakhs in today's terms, by the time Mr.
Shah turns 60. Assuming medical expense inflation at 10% p.a., this means they
need approximately Rs. 67.27 lakhs ready corpus, available in 2030.
To build this corpus, Mr. Shah needs to invest the relatively easy amount of Rs.
7,200 per month into a good equity mutual fund portfolio. Assuming 15% return on
equity, the medical corpus will be built by the year 2027. Mr. Shah can then
redeem the equity corpus and invest it into a safe fixed income instrument so
that when he retires, his medical corpus is not exposed to the volatility of the
equity markets.
Vacation Planning
A foreign vacation worth Rs. 5 lakhs today is going to cost Rs. 33.60 lakhs in
20 years, at Mr. Shah's age of 60.
The vacation he wants to take at age 63 will cost him Rs. 45 lakhs.
At age 66, it will cost Rs. 60 lakhs and at age 79 it will cost almost Rs. 80
lakhs. To take these vacations every 3 years starting at the age of 60 going on
till the age of 70, Mr. Shah needs to build a corpus of Rs. 1.70 crore by the
age of 60. This corpus can be held in debt instruments, and utilized for
vacations every 3 years. To build this corpus, Mr. Shah needs to invest Rs.
18,000 per month into a good equity mutual fund portfolio. This will build the
corpus by his age of 57, and the corpus can be invested into debt for the
remaining 3 years.
Overview
To meet the above
stated goals of Retirement Planning, Vacation Planning and Medical Contingency
Planning, Mr. Shah needs to start investing Rs. (1,27,000 + 7,200 + 18,000) per
month i.e. Rs. 1,52,200 per month from today. So, he needs an investible surplus
of at least this amount every month.
If this amount is
not available monthly, Mr. Shah will either need to forego a lower priority
goal, or reduce overall goal requirement. This is where Mr. Shah's personal
indication comes in. He can reduce his expected retirement expenses, and keep
track of his expenses when he retires. If not the retirement goal, his other
choice is to plan for a lower medical contingency. However, the conservative way
of doing things would be to consider reduction in vacation expenses. Instead of
every 3 years, planning for foreign vacations every 4 or 5 years
Conclusion
After going through
the above process, Mr. Shah has benefited in the following ways:
- He knows his goal requirements
- He knows how much to invest, how to invest
(de-risking his corpus) and where to invest for his goals.
- Most importantly, he has awareness, and
with awareness he will have peace of mind.
Mr. Shah has taken
control of his financial goals by planning for the kind of life he wants to
live.
Have you planned for
the kind of life you want to live?
Courtesy:
http://www.personalfn.com/
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